UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the transition period from to
Commission file number 0-23170
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2134871
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
850 Third Avenue, 11th Floor, New York, NY 10022
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number: (212) 508-3560
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $0.0001
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant. The
aggregate market value computed on the basis of the last sale
price on March 24, 2000, is $33,992,631.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date. 11,372,561
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DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference in Part III of this report is the
definitive proxy statement of Headway for the 1999 annual meeting
of stockholders, which Headway proposes to file with the
Securities and Exchange Commission on or before April 29, 2000.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Business 3
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7A. Quantitative and Qualitative Disclosures
About Market Risk 21
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
Part III
10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners and
Management *
13. Certain Relationships and Related Transactions *
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 22
* These items are incorporated by reference from the
definitive proxy statement of Headway for the 2000 annual meeting
of stockholders to be filed with the Securities and Exchange
Commission on or before April 29, 2000.
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PART I
Item 1. Business
General
Headway Corporate Resources, Inc. ("Headway") is a leading
provider of human resource and staffing services to the financial
services industry. In 1999, Headway began a program to diversify
its specialization outside of financial services and currently
provides services to other industries such as e-commerce, media,
entertainment, information technology and telecommunication. In
connection with this diversification strategy, Headway acquired
Tyzack Holdings Limited, ("Tyzack"), an executive search firm
based in the United Kingdom, in late 1999.
The financial services industry consists of investment
banking firms, banking institutions, insurance companies, credit
card service companies, and other finance companies, and extends
by association to real estate companies, appraisal firms, law
firms, accounting firms, and other service companies that
participate in the financial services industry. Headway's
history of service in the industry, which began in 1984 with
executive search services, enables it to understand the
complexity of the products and services offered by the financial
services industry, assist the client in identifying the human
resources required to support those products and services, and
develop industry specific solutions for the human resources needs
of the client. The industries that Headway is expanding into are
a natural progression, as many of these industries are looking to
financial service companies to staff senior positions. Headway
established its staffing service business through 18 acquisitions
of staffing and professional services companies since 1996.
Headway's acquisitions and internal business development over the
past two years have resulted in substantial growth. Total
revenues in 1999 were $360.7 million as compared to $291.3
million in 1998 and $142.8 million in 1997.
The human resource management services offered by Headway
consist of:
* temporary staffing and value added services,
* information technology ("IT") and professional staff services,
* executive search and permanent placement services, and
* contract staff administration services.
In temporary staffing and value added services, Headway
provides employees to clients for periods ranging from one day to
several months. These employees satisfy a specific job skill
need arising from absenteeism, special projects, fluctuations in
the client's volume of business inherent in the business cycle,
technology and business system changes, and other causes. The
thrust of Headway's marketing approach is "SmartSizing", which is
a human resource management policy of controlling and minimizing
the fixed cost of employees by expanding and contracting the
client's workforce as needed to meet its specific business needs
as they change. The job skills required by clients and offered
by Headway consist of "office/clerical" personnel, including
secretaries, office workers, and, administrative staff. Value
added services include payroll services and more involved
arrangements where Headway assumes some or all of the
administrative functions of employment on-site at the client's
business, which is commonly referred to as "vendor-on-premises".
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Headway offers IT/professional staff services in which
accountants, computer programmers and technicians, desktop
publishing operators, network administrators, and computer
graphic specialists are placed on a temporary, contract, or
permanent basis.
Executive search services focuses on placing middle to upper
level management positions in the financial services industry and
permanent placement involves placement of office/clerical and
IT/professional personnel.
Headway offers contract staff administration services where
it assumes the position of employer for long-term contingent
workers used frequently by clients and manages the scheduling of
these contingent workers to make them available to service
clients' needs.
Headway's goal is to build a national staffing business
focused on providing these services with an emphasis in the
financial services industry as well as other identified
industries. Headway's strategy for achieving this goal is to
make acquisitions, to emphasize programs that generate internal
growth and to continue to conduct operations through a
decentralized "Hub-Spoke" management model. Headway will seek
strategic acquisitions specifically looking for fold-ins to
existing hub operations in order to strengthen and add to
existing business lines as well as continue the diversification
program.
Industry Overview
The temporary employment service industry has experienced
significant growth in response to the changing work environment
in the United States. Fundamental changes in the employer-
employee relationship continue to occur, with employers
developing increasingly stringent criteria for permanent
employees, while moving toward project-oriented temporary and
contract hiring. These changes are a result of increasing
automation that has resulted in shorter technological cycles, and
global competitive pressures. Many employers responded to these
challenges by turning to temporary and contract personnel to keep
personnel costs variable, achieve maximum flexibility, outsource
highly specialized skills, and avoid the negative effects of
layoffs.
Changes in employment practices are especially evident in
the financial services industry. Due to the robust economy over
the past several years, the financial services industry
experienced substantial growth and developed new products and
services for investors and other participants in the capital and
asset-based markets. Changes in the regulation of banking
institutions, securities firms, and insurance companies allow
them to go beyond their traditional activities into new lines of
business. These changes in the industry, together with peaks and
valleys in business activity within the financial services
industry, result in a substantial demand for more flexible and
efficient workforce resources, management expertise, and
improvements in IT resources.
Rapidly changing regulations concerning employee benefits,
health insurance, retirement plans, and the highly competitive
business climate have also prompted many employers to take
advantage of the flexibility offered through temporary and
contract staffing. Additionally, Internal Revenue Service and
Department of Labor regulations concerning the classification of
employees and independent contractors have significantly
increased demand by prompting many independent contractors to
affiliate with employers like Headway.
The temporary staffing industry grew rapidly in recent years
as companies used temporary employees to manage personnel costs,
while meeting specialized or fluctuating staffing requirements.
According to the most recent available information in the
Staffing Industry Report, the United States temporary staffing
industry grew from approximately $28.9 billion in revenue in 1993
to approximately $62.0 billion in revenue in 1998, a compound
annual growth rate of approximately 17%. One of the
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fastest growing sectors for Headway, as well as the industry, is
information technology services. Revenue for this sector grew at
an estimated compound annual rate of 26.2% from approximately
$5.7 billion in 1993 to approximately $18.2 billion in 1998.
Professional and technical staffing within the temporary staffing
industry requires longer-term, more highly skilled personnel
services. Headway believes professional and technical staffing
offers the opportunity for higher profitability than clerical
staffing, because of the value-added nature of professional and
technical staffing personnel. Headway believes the staffing
services industry is highly fragmented with over 8,000 staffing
companies and 2,500 information technology and professional
staffing companies. The National Association of Temporary and
Staffing Services has estimated that more than 90% of all U.S.
businesses utilize temporary staffing services.
Growth Strategy
Headway's strategy for growth in existing and new markets is
to:
* pursue strategic acquisitions
* increase focus on professional and technical staffing services
* enhance and expand offices
Pursue Strategic Acquisitions. Although at a slower pace,
Headway intends to continue to acquire independent staffing
services companies located in attractive geographic locations
with strong management, profitable operating results, recognized
local and regional presence, and a client base that will advance
our diversification program. Since May 1996, Headway has
acquired 18 companies in nine states and the United Kingdom.
Headway intends to pursue strategic acquisitions of staffing
services companies in major metropolitan areas where Headway
already has an established presence to serve as Hubs, and fold-in
additional acquisitions, or spokes, in the same area as
established Hubs that increase penetration of existing markets.
In the coming year, Headway expects to focus its acquisition
activity primarily on spokes or fold-in acquisitions that are in
the same area as established Hubs, rather than on new Hub
acquisitions. Headway has established a team of corporate
officers responsible for identifying prospective acquisitions,
performing due diligence, negotiating contracts, and subsequently
integrating the acquired companies. Headway typically retains
management of acquired companies and includes in the
consideration for the acquisitions long-term earnout arrangements
based on performance as incentive for improving operating
results. Headway intends to use a combination of available cash,
debt, long-term earnout arrangements and equity.
Increase Focus on Professional and Technical Staffing
Services. Headway's strategy is to increase the percentage of
total revenues and gross profits contributed by IT/professional
staffing services by expanding its service offerings in the
fields of information technology staffing and consulting and
accounting and finance staffing. Headway also intends to grow
its pool of skilled professionals, hire additional sales
consultants, target mid-size and large companies, and leverage
client relationships. Headway believes that providing
professional and technical staffing services to its clients
offers attractive opportunities for growth in sales and profits.
Based on client demand for IT/professional staffing services on a
national basis, Headway intends to increase the pace of
acquisitions of IT/professional staffing services companies in
major metropolitan markets.
Enhance and Expand Offices. Headway plans to develop its
current Hubs by expanding the services offered, adding temporary
staffing and permanent placement consultants, pursuing new
clients, expanding current client relationships, cross-marketing
services, and assisting Hubs in developing successful marketing
and internal business growth techniques. To facilitate the
offering of new services in Hub markets, Headway plans to acquire
companies offering services which complement and expand
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the Hub's existing services, and transfer or recruit experienced
personnel for positions in its Hub locations that will expand the
services offered. Increased service offerings enables Headway to
expand existing client relationships through cross-selling, and
to approach new clients with a variety of staffing needs.
Headway relies on its regional managers, in consultation with
corporate staff, to drive this internal growth and to determine
which service, marketing, and business techniques are most
appropriate for their local markets.
Operating Strategy
The key elements of Headway's operating strategy include
* diversify into new industries, while still emphasizing
the financial services industry
* integrate acquired companies quickly
* foster an entrepreneurial environment with Hub-Spoke
management model
* provide corporate level support
* deliver high, value-added quality service
Diversify Into New Industries. In 1999, Headway began a
program to diversify its specialization outside of financial
services and currently provides services to other industries such
as e-commerce, media, entertainment, information technology and
telecommunication. In connection with this diversification
strategy, Headway acquired Tyzack in late 1999.
Headway has a strong presence in the financial services
industry. Headway will continue to focus on this industry,
because Headway believes there is a substantial untapped market
for its services in this industry and because its core strengths
of industry experience and human resources expertise enable it to
develop unique, value-added staffing solutions for the financial
services industry. Headway will work to maintain its
relationships with existing clients in the industry, expand
service offerings in existing and future Hub locations, cross-
sell services to existing clients, and seek acquisitions with an
existing client base in the financial services industry.
Although Headway expects to focus on this industry, it expects
that it will continue to have a diversified client base, with no
more than 50% of its annual revenues being derived from financial
services clients.
Integrate Acquired Companies Quickly. As soon as
practicable after an acquisition is completed, management begins
integrating newly acquired companies into the Hub-Spoke
management model. Headway has a dedicated team of professionals
who implement a formal process of budgeting and quarterly
performance reviews as well as its disciplined financial
management system at all newly acquired companies. The
integration process involves installing back-office management
information systems and standardizing each acquired company's
accounting and financial procedures with those of Headway.
Marketing, sales, field operations, and personnel programs of the
acquired companies are reviewed and, where appropriate, corporate
management provides guidance and assistance on improving these
functions.
Foster Entrepreneurial Environment With Hub-Spoke Management
Model. Headway employs a decentralized, Hub-Spoke management
model. Local regional managers manage Headway's operations in
each market, including any satellite offices in that market.
Headway believes it has a strong market presence in each of its
major markets largely due to the commitment, ability, and
creativity of its regional
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managers who drive each local business. Headway fosters this
entrepreneurial environment by giving its regional managers the
authority to respond quickly and creatively to client needs.
Regional managers are responsible for achieving operational and
financial objectives, including revenues and earnings growth, and
have authority over hiring, recruiting, compensation, pricing,
and sales management. Headway believes that accountability and
authority, combined with the support of Headway's corporate level
support services, enables its regional managers to compete
successfully in the local marketplace. Headway also believes
this entrepreneurial environment allows Headway to attract
talented managers and successfully serve its clients' needs.
Provide Corporate Level Support. Headway's philosophy is
that the central function of corporate management is to support
the staffing consultants who directly interact with clients.
Headway provides regional managers corporate level support to
lessen their administrative burden and allow them to focus on
servicing clients and growing the business. Corporate management
has developed certain financial, risk management, and
administrative control procedures, which are applied to each Hub.
These control procedures include the preparation of annual
business plans and budgets and the submission of detailed monthly
financial reports. This information is reviewed at the end of
each fiscal quarter by Headway's management together with
regional managers. Additional support functions include
marketing, management information system support, training, human
resources, accounting, and other back office functions. Headway
believes its Hub-Spoke management model is readily adaptable and
scaleable as Headway continues to grow.
Deliver High, Value-Added Quality Service. Headway
emphasizes recruiting, training, and retaining experienced sales
consultants and providing highly qualified temporary employees.
Headway trains its sales consultants to operate as partners with
their clients in evaluating and meeting the client's staffing
requirements. Headway promotes and monitors quality of service a
number of ways. It seeks highly qualified temporary employees
through referrals from existing temporary employees and conducts
in-depth interviews by Company personnel experienced in the
temporary employees' field. Headway performs skill evaluations
and offers programs to its temporary employees to improve their
skills. Headway contacts clients within hours of the beginning
of a project to receive a preliminary determination of
satisfaction, and obtains client satisfaction reports upon the
completion of projects. Headway seeks to understand and
proactively assess clients' needs, respond promptly to clients'
requests, and continually monitor job performance and client
satisfaction. Headway believes that its commitment to providing
quality service has enabled it to establish and maintain long-
term relationships with clients.
Services
The human resource management services offered by Headway
include
* temporary staffing and value added services
* IT/professional staff services
* executive search and permanent placement services, and
* contract staff administration services.
Temporary Staffing and Value Added Services. Headway
provides employees to clients for periods ranging from one day to
several months to satisfy a specific job skill need arising from
absenteeism, special projects, fluctuations in the client's
volume of business inherent in the business
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cycle, technology and business system changes, and other causes.
The job skills required by clients and offered by Headway range
from entry level clerks and secretaries to master administrative
assistants.
Under vendor-on-premise programs, Headway assumes
administrative responsibility for coordinating some or all
staffing services at a client's location or organization,
including recruiting activities, skills testing and training.
Headway also provides payroll services to its clients for its
permanent employees, thereby mitigating the administrative burden
of employment. By using Headway's services, clients can make
changes in workforce quickly without the administrative burden
and cost of hiring and firing.
IT/Professional Staff Services. Rapid changes in technology
and competitive pressures in the financial services industry
create demand by employers for computer programmers and
technicians, desktop publishing operators, network
administrators, and computer graphic specialists to help
implement the systems required to meet these challenges. Headway
offers to its clients IT/professional staff services in which
persons with these special skills are placed on a temporary,
contract, or permanent basis.
Executive Search and Permanent Placement. Headway, through
its Whitney subsidiary, is one of the leading executive search
firms in the financial services industry. With the acquisition
of Carlyle in 1998 and Tyzack in 1999, Headway has expanded its
industry focus to include management consulting, e-commerce,
media, entertainment, information technology and
telecommunication businesses. Headway uses a complete
consultative approach with its clients, including, market
analysis, product recommendations, and staffing new and existing
business divisions of its clients. Headway conducts executive
searches in a broad range of product areas in the financial
services industry, including, investment banking, capital
markets, leveraged finance, research, emerging markets,
investment management, financial administration, and risk
management. Executive search services are provided in major
financial markets, including, New York, Chicago, Boston, London,
Tokyo, Hong Kong, and Singapore.
Headway also provides permanent placement services to its
clients for office/clerical positions and IT/professional
personnel. Clients use Headway's temporary staffing services as
a means for locating and evaluating new personnel with a view to
permanent employment. Clients are able to evaluate the abilities
and productivity of workers during temporary employment through
Headway and make informed decisions on whether to retain the
workers on a permanent basis, all without the administrative
burden associated with adding the workers to their workforce from
the outset.
Contract Staff Administration Services. Many of Headway's
clients use long-term contingent workers on a regular basis to
satisfy recurring needs for highly skilled workers in the areas
of accounting, finance, business administration, marketing,
computer programming, computer graphics, and other areas
requiring a high level of business or technical expertise. The
use of contingent workers on a regular basis can create a number
of problems for clients. The possibility always exists that
these workers will accept employment elsewhere that prevents him
from being available to the client when needed. Furthermore,
there is always a risk contingent workers will be viewed by
federal and state taxing authorities as employees rather than
contingent workers for income tax withholding and benefits
purposes. To mitigate these potential problems, Headway offers a
service where it assumes the position of employer for the
independent contractors. As employer, Headway manages the
scheduling of these people to make them available to service the
needs of the clients, and implements income tax withholding and
other employee benefit programs to ensure compliance with the
legal requirements of employment under applicable federal and
state laws.
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Client Relationships
Headway has a broad client base. Headway's largest client
accounted for approximately 11% of Headway's 1999 revenues. The
revenues generated by this client represent primarily payrolling
services provided by Headway, which generates a low gross margin
compared to Headway's other staffing services.
Human Resources
Employees. As of December 31, 1999, Headway had
approximately 500 full-time employees. By the fourth quarter of
1999, Headway employed almost 10,000 temporary employees in a
typical week. None of Headway's employees, including its
temporary employees, is represented by a collective bargaining
agreement. Headway believes its employee relations to be strong.
Hourly wages for Headway's temporary employees are determined
according to local market conditions. Headway pays mandated
costs of employment, including the employer's share of social
security taxes, federal and state unemployment taxes,
unemployment compensation insurance, general payroll expenses and
workers' compensation insurance. Headway offers access to
various insurance programs and other benefits, such as vacations,
holidays and 401(k) programs to qualified temporary employees and
professionals.
Recruiting. Headway's recruiting process is influenced by
its clients' changing demands and recognizes that the competition
for quality is high. In order to ensure that Headway attracts
high caliber candidates, it maintains ongoing exposure and
communication with recruiting sources. Recruiting sources
include, newspaper advertisement, internet sourcing, referrals
from our employees and clients, and outreach to various
educational institutions, community groups, job fairs, and other
sources. Every internal and temporary employee is empowered to
recruit new temporary workers. Their positive experience with
Headway is a motivating factor, as well as a number of special
bonuses and incentives that are offered.
Assessment, Training and Quality Control. Headway's process
begins with the applicant completing an application for
employment followed by an interview with an experienced
recruiter. The interview seeks to determine the level of
responsibility the applicant is capable of handling in addition
to assessing the motivation, enthusiasm, and energy level of the
candidate. Headway uses a variety of job skill evaluating
methods. For example, basic software skills are evaluated by the
applicant's use of the QWIZ product, a comprehensive office skill
evaluation program, helping Headway efficiently screen large
numbers of applicants each week in basic word processing,
spreadsheet, and business graphics functionality. The QWIZ
system analyzes the range and depth of an individual's skill in
each area tested. Automated scoring supplies consistent and
standard methods of assessing skill levels. Computerized
tutorials are generally available for temporary employees who
seek to upgrade their typing, data entry, office automation, or
word processing skills. Each Hub carefully monitors client
satisfaction with the performance of employees provided by
Headway to assess and control quality of service.
Operations
Sales and Marketing. Headway's services are marketed
through its network of Hubs whose managers and placement
coordinators make regular personal sales visits to clients and
prospective clients. Headway emphasizes long-term personal
relationships with clients who are developed through regular
assessment of client requirements and constant monitoring of
temporary staff performance. New clients are obtained through
sales calls, consultation meetings with target companies, and
client referrals. Headway's management and regional managers
participate in national and regional trade associations, local
chambers of commerce, and other civic associations. Headway
monitors sales, marketing, and recruiting functions to identify
opportunities to deliver high value-added quality services.
Headway
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believes that its clients select service providers principally on
the basis of quality of service, range of services offered,
specialized expertise, and ability to service multiple locations,
and Headway is striving to satisfy these criteria in its
marketing efforts.
Hubs. Headway's decentralized operating strategy uses a Hub-
Spoke management model in which regional managers manage
Headway's operations in each market. Headway's current hubs are
located in New York, California, North Carolina and Texas, with
spoke offices in Connecticut, Florida, New Jersey and Virginia.
Whitney, Headway's executive search division, has offices in New
York, Illinois, Masschusetts, the United Kingdom, Japan, Hong
Kong and Singapore.
Regional managers operate their Hubs with a significant
degree of autonomy and specific areas of accountability to
Headway. Headway has developed programs designed to motivate the
regional managers and former owners to maximize the growth and
profitability of their branches while securing long-term client
relationships. Regional managers report directly to corporate
management. Operating within the guidelines set by Headway, the
regional managers are responsible for pursuing new business
opportunities and focusing on sales and marketing, account
development and retention, and employee recruitment, development,
and retention.
Management Information Systems. Headway licenses StaffCord
software from Concord Technologies. StaffCord is an integrated
front/back office operating platform for temporary services and
permanent employment agencies. The software runs in a Novell LAN
environment throughout most of Headway's branches. In 1998,
Headway entered into a licensing agreement with Great Plains
Software to install Great Plains Dynamics C/S+, an enterprise-
wide client/server based accounting software product. The
accounting program became operational in January 2000. In
addition, Headway has purchased the underlying code of the
Dynamics product and is producing a derivative work for the
exclusive use of Headway, pursuant to a special addendum to the
licensing agreement. The new product will run on a Microsoft SQL
server platform with high-speed data communication being provided
through a Frame Relay connection with MCI. Headway maintains a
state of the art software development lab in Knoxville, TN
staffed with professional programmers and system analysts who
support the applications of the firm nationally. Headway
believes that its systems are readily expandable and scaleable to
support a rapidly growing infrastructure.
Competition
The staffing industry is intensely competitive and
fragmented and has limited barriers to entry. Headway competes
for employees and clients in national, regional, and local
markets with full-service and specialized temporary staffing
service businesses. A significant number of Headway's
competitors have greater marketing, financial, and other
resources and more established operations than Headway. Price
competition in the staffing industry is intense and pricing
pressures from competitors and customers are increasing. Many of
Headway's clients have relationships with more than one staffing
service company. However, in recent years, an increasing number
of companies have consolidated their staffing services purchases
and entered into exclusive contracts with a single temporary
staffing company or small number of temporary staffing companies.
If current or potential clients enter into exclusive contracts
with competitors of Headway, it will be difficult or impossible
for Headway to obtain business from such clients. Headway
expects that the level of competition will remain high in the
future, which could limit Headway's ability to maintain or
increase its market share or maintain or increase gross margins.
However, Headway believes that its strategy of becoming a
dominant provider in each of its markets will allow it to remain
competitive in this environment
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In addition, Headway competes for acquisition candidates
with other staffing services companies, and there can be no
assurance that Headway will be able to successfully identify
suitable acquisition candidates or complete acquisitions.
Regulation
Generally, Headway's operations are not subject to state or
local licensing requirements or other regulations specifically
governing the provision of commercial and professional staffing
services. There can be no assurance, however, that states in
which Headway operates or may operate in the future will not
adopt such licensing or other regulations affecting Headway.
The laws of various states require Headway to maintain
workers' compensation and unemployment insurance coverage for its
temporary employees. Headway maintains state mandated workers'
compensation and unemployment insurance coverage. The extent and
type of health insurance benefits that employers are required to
provide employees have been the subject of intense scrutiny and
debate in recent years at both the national and state levels.
Proposals have been made to mandate that
employers provide health insurance benefits to staffing
employees. In addition, some states could impose sales taxes, or
raise sales tax rates, on staffing services. Further increases in
such premiums or rates, or the introduction of new regulatory
provisions, could substantially raise the costs associated with
hiring and employing staffing employees.
Intellectual Property
Headway maintains a number of trademarks, tradenames,
service marks and other intangible rights. Headway believes that
it has all rights to trademarks and trade names necessary for the
conduct of its business and is not currently aware of any
infringing uses or other conditions that would materially and
adversely affect its use of proprietary rights.
Acquisition History
In 1996, Headway acquired Irene Cohen Temps, Inc., Corporate
Staffing Alternatives, Inc., Certified Technical Staffing, Inc.,
and the operating assets of Irene Cohen Personnel, Inc.
(collectively the "Irene Cohen Group"), all of which are based in
New York City, and the assets of Vogue Personnel Services, Inc.,
of New York City, which were incorporated into the operations of
the Irene Cohen Group.
In 1997, Headway acquired Advanced Staffing Solutions, Inc.,
based in Raleigh-Durham, North Carolina; Administrative Sales
Associates Temporaries, Inc., and Administrative Sales
Associates, Inc., both operating in New York City; Quality
OutSourcing, Inc., based in New York; and E.D.R. Associates,
Inc., and Electronic Data Resources, L.L.C., both based in
Windsor, Connecticut.
In 1998, Headway acquired Cheney Associates and Cheney
Consulting Group of Hamden, Connecticut; Shore Resources,
Incorporated, of Los Angeles, California; substantially all of
the assets of the Southern Virginia offices of Select Staffing
Services, Inc., based in McLean, Virginia; Staffing Solutions,
Inc., and Intelligent Staffing, Inc., of Miami Lakes, Florida;
Phoenix Communication Group, Inc. of N.J., based in Woodbridge,
New Jersey; Carlyle Group Ltd. Of and Staffing Alternatives
International, Inc. and VSG Consulting, Inc. based in Dallas,
Texas.
In 1999, Headway acquired the Resource Management Division
of Nine Rivers Technology Corporation with offices in Raleigh,
North Carolina, Boca Raton, Florida, and Dallas, Texas. In
addition, we acquired the capital stock of Tyzack Holdings
Limited with offices in London and Leeds, United Kingdom.
11
<PAGE>
The following table sets forth information on our
acquisitions from 1996 through 1999.
<TABLE>
<CAPTION>
Date Year
Company Acquired Location Founded Services
<S> <C> <C> <C> <C>
Irene Cohen Group May 1996 New York City 1977 Temporary,
IT, Contract,
Permanent
Vogue Personnel Services Oct. 1996 New York City 1974 Temporary, IT
Advanced Staffing Solutions, Inc. Mar. 1997 Raleigh-Durham, NC 1965 Temporary,
IT, Contract
Administrative Sales Associates July 1997 New York City 1976 Temporary, IT,
Temporaries, Inc., and Permanent
Administrative Sales Associates, Inc.
Quality OutSourcing, Inc. Sept. 1997 New York City 1989 Temporary,
Permanent
E.D.R. Associates, Inc. and Sept. 1997 Windsor, CT 1984 IT
Electronic Data Resources, L.L.C.
Cheney Associates and Mar. 1998 Hamden, CT 1987 IT
Cheney Consulting Group
Shore Resources, Incorporated Mar. 1998 Los Angeles, CA 1976 Temporary, IT,
Permanent
Select Staffing Services, Inc. Mar. 1998 Southern, VA 1960 Temporary,
Payrolling
Staffing Solutions, Inc., and June 1998 Southern, FL 1989 Temporary,
Intelligent Staffing, Inc. Permanent
Phoenix Communication Group, Inc. June 1998 Woodbridge, NJ 1987 IT
Carlyle Group, Ltd. July 1998 Chicago, IL 1982 Search
Staffing Alternatives International, Inc. Nov. 1998 Dallas, TX 1995 IT
and VSG Consulting, Inc.
Resource Management Division of June 1999 Raleigh, NC 1994 IT
Nine Rivers Technology Corporation Boca Raton, FL
Dallas, TX
Tyzack Holding Limited Nov. 1999 London, UK 1959 Search
Leeds, UK
</TABLE>
Headway's acquisitions and internal business development
since May 1996, have resulted in substantial growth. Total
revenues in 1999 were $360.7 million as compared to $291.3
million in 1998 and $142.8 million in 1997.
12
<PAGE>
Item 2. Properties
Headway's corporate headquarters are currently located at
850 Third Avenue, 11th Floor, New York, NY 10022. Headway
believes that space at its corporate headquarters will be
adequate for its needs.
Headway leases space for all of its Hub-Centers and does not
own any real property. Headway believes that its facilities are
adequate for its needs and does not anticipate inordinate
difficulty in replacing such facilities or opening additional
facilities, if needed.
Item 3. Legal Proceedings
In the ordinary course of its business, Headway is
periodically threatened with or named as a defendant in various
lawsuits, including discrimination, harassment, and other similar
claims. Headway maintains insurance in such amounts and with
such coverage and deductibles as management believes are
reasonable.
In February 1999, a lawsuit was filed in the Superior Court
of California alleging breach of contract, interference with
prospective business relations, misappropriation of trade secrets
and unfair competition. The plaintiffs are competitors of
Headway and seek an unspecified amount of monetary damages.
Headway believes these claims are unfounded and intends to defend
itself vigorously. Headway has filed a motion for summary
judgement in its favor on those claims alleging that it
interfered with its competitor's customers or engaged in unfair
competition regarding customers.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the
fourth quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Since September 4, 1998, Headway's Common Stock has traded
on the Nasdaq National Market ("NNM") under the symbol "HDWY."
Previously, quotations for Headway's Common Stock were reported
on the Nasdaq SmallCap Market. Headway received notification
from the NNM that its Common Stock would be delisted from the NNM
if the minimum bid price for the Common Stock remains below $5.00
per share. Headway has appealed this determination and a hearing
on the matter has been scheduled for April 6, 2000. Headway can
not predict at this time whether it will be able to maintain its
listing on the NNM. It has filed an application for listing its
Common Stock on the Nasdaq SmallCap Market in the event of an
adverse determination.
13
<PAGE>
The following table sets forth, (i) the high and low closing
sale prices for the Common Stock as reported on the Nasdaq
National Market for the last calendar quarter of 1998 and all of
1999, and (ii) the high and low bid prices for the Common Stock
for all prior periods listed, which are based on inter-dealer bid
prices without markup, markdown, commissions, or adjustments, and
may not represent actual transactions.
Calendar Quarter Ended High ($) Low ($)
March 31, 1998 8.875 4.125
June 30, 1998 12.750 7.375
September 30, 1998 11.875 4.313
December 31, 1998 7.000 4.250
March 31, 1999 6.063 3.625
June 30, 1999 5.375 3.938
September 30, 1999 6.500 4.500
December 31, 1999 5.125 3.188
In March 1998, Headway completed a financing consisting of a
$75.0 million senior credit facility, $20.0 million of Series F
Convertible Preferred Stock and $10.0 million of senior
subordinated debt. Headway used a portion of the new financing
to pay down existing debt obligations and a portion to finance
the acquisitions completed in 1999 and 1998. The balance of the
financing will be used for future acquisitions and for general
working capital. NationsBank N.A. acted as agent for the senior
credit facility. NationsBanc Montgomery Securities, LLC, acted as
placement agent for the Series F Convertible Preferred Stock and
senior subordinated notes. All of the securities were offered and
sold under the exemption from registration set forth in Section
4(2) of the Securities Act of 1933. In June 1999 the senior
credit facility was increased to $100.0 million on substantially
the same terms as the original facility.
Headway has authorized and outstanding 1,000 shares of
Series F Convertible Preferred Stock ("Series F Stock"). The
Series F Stock is convertible to Common Stock of Headway on the
basis of the liquidation preference of the Series F Stock at a
conversion price of $5.58 per share. The Series F Stock is
senior to the Common Stock with respect to payment of dividends
and distributions in liquidation. Holders of the Series F Stock
are entitled to receive dividends payable quarterly equal to 5.5%
(increasing to 7.5% on March 19, 2000) of the liquidation
preference value of the Series F Stock, which is $20,000 per
share or a total of $20.0 million. No dividends or distributions
may be made with respect to the Common Stock unless all dividend
payments on the Series F Stock are current. Holders of Headway's
Series F Convertible Preferred Stock have the right to elect one
member of the Board of Directors, elect one-third of the Board of
Directors so long as a default in dividend payments exists and is
continuing, and approve certain corporate transactions and
activities, including, acquisitions in excess of specified
limits, sales of substantial assets or subsidiaries, implementing
additional debt facilities in excess of specified limits, sales
of Company securities in certain circumstances, amending
Headway's charter documents, effecting or permitting a sale of
Headway, issuing stock options and similar incentive arrangements
involving Headway's securities, and other matters. The existence
of these rights could inhibit the ability of Headway to effect or
participate in transactions acceptable to Headway but not the
holders of the Series F Convertible Preferred Stock, or the
ability of stockholders to participate in a transaction in which
they might otherwise receive a premium for their shares over the
then-current market price.
Since its inception, no dividends have been paid on
Headway's Common Stock. Headway intends to retain any earnings
for use in its business activities, so it is not expected that
any dividends on the Common Stock will be declared and paid in
the foreseeable future.
14
<PAGE>
As of March 23, 2000, Headway had approximately 245
stockholders of record.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below as
of and for the years ended December 31, 1999, 1998, 1997, 1996,
and 1995, were derived from audited consolidated financial
statements of Headway.
<TABLE>
<CAPTION>
Statement of Income Data
In Thousands, Except Per Share Data
For Year Ended December 31
--------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 10,996 $ 53,389 $ 142,842 $ 291,303 $ 360,742
Direct expenses - 29,703 104,396 224,993 274,360
General and administrative expenses 9,364 19,535 29,588 48,638 65,678
Termination of employment contract - - - - 2,329
Depreciation and amortization 226 514 1,453 2,952 4,411
Total operating expenses 9,590 20,049 31,041 51,590 70,089
Operating income from continuing operations 1,406 3,637 7,405 14,720 16,293
Other (income) expenses:
Interest expenses 65 1,088 2,662 4,515 6,331
Interest income (60) (91) (104) (152) (122)
(Gain) on sale of investment - - (4,272) (901) -
Other expenses, net - (51) (750) - -
5 946 (2,464) 3,462 6,209
Income from continuing operations before income
tax expense 1,401 2,691 9,869 11,258 10,084
Income tax expense 696 945 4,064 4,639 4,299
Income from continuing operations 705 1,746 5,805 6,619 5,785
(Loss) from discontinued operations (1,800) (564) (2,999) - -
Net (loss) income before extraordinary item (1,085) 1,182 2,806 6,619 5,785
Extraordinary (loss) - - - (1,557) -
Net income (loss) (1,085) 1,182 2,806 5,062 5,785
Deemed dividend on preferred stock - (1,470) - - -
Preferred dividend requirements (56) (276) (137) (866) (1,100)
Net income (loss) available for common stockholders $ (1,141) $ (564) $ 2,669 $ 4,169 $ 4,685
Basic earnings (loss) per common share:
Continuing operations $ 0.14 $ - $ 0.79 $ 0.58 $ 0.46
Discontinued operations (0.39) (0.11) (0.42) - -
Extraordinary item - - - (0.15) -
Net income (loss) $ (0.25) $ (0.11) $ 0.37 $ 0.43 $ 0.46
Diluted earnings (loss) per common share:
Continuing operations $ 0.10 $ - $ 0.58 $ 0.47 $ 0.40
Discontinued operations (0.35) (0.11) (0.30) - -
Extraordinary item - - - (0.11) -
Net income (loss) $ (0.25) $ (0.11) $ 0.28 $ 0.36 $ 0.40
Average shares outstanding
Basic 4,597,358 4,995,523 7,223,462 9,853,354 10,287,978
Diluted 6,771,032 4,995,523 10,012,198 14,157,012 14,328,754
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
In Thousands
As of December 31
-----------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 1,494 $ 1,648 $ 450 $ 32,139 $ 30,566
Total assets 12,142 34,669 67,336 126,946 148,419
Long term debt, excluding current portion 1,901 7,250 19,059 60,959 72,750
Stockholders' equity $ 5,302 $ 13,424 $ 16,452 $ 42,571 $ 48,001
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition
and Results of Operations
Overview
Headway, is a leading provider of human resource and
staffing services with a specialty in the financial services
industry. In 1999, the Headway began a program to diversify its
specialization outside of financial services and currently
provides services to other industries such as e-commerce, media,
entertainment, information technology and telecommunication. In
connection with this diversification strategy, Headway acquired
Tyzack in late 1999. The financial services industry as broadly
defined includes; investment banking firms, banking institutions,
insurance companies, credit card service companies, and other
finance companies, and extends by association to real estate
companies, appraisal firms, law firms, accounting firms, and
other service companies that participate in the financial
services industry. Headway's history of service in the industry,
which began in 1984 with executive search services, enables it to
understand the complexity of the products and services offered by
the financial services industry, assist the client in identifying
the human resources required to support those products and
services, and develop industry specific solutions for the human
resources needs of the client. The industries that Headway is
expanding into are a natural progression for us, as many of these
industries are looking to financial services companies to staff
senior positions. Headway has established its staffing service
business through 18 acquisitions of staffing and professional
services companies since 1996. Headway's acquisitions and
internal business development over the past three years have
resulted in substantial growth. Total revenues in 1999 were
$360.7 million as compared to $291.3 million in 1998 and $142.8
million in 1997.
The human resource management services offered by Headway
consist primarily of temporary staffing and value-added services,
IT/professional staff services, executive search and permanent
placement services, and contract staff administration services.
In temporary staffing and value added services, Headway provides
employees to clients for periods ranging from one day to several
months to satisfy a specific job skill need arising from
absenteeism, special projects, fluctuations in the client's
volume of business inherent in the business cycle, technology and
business system changes, and other causes. The thrust of
Headway's marketing approach for its temporary staffing and value
added services is "Smart Sizing", which is a human resource
management policy of controlling and minimizing the fixed cost of
employees by expanding and contracting the client's workforce as
needed to meet its specific business needs as they change. The
job skills required by clients and offered by Headway consist
primarily of "office/clerical" personnel, including, secretaries,
office workers, and, administrative staff. Value added services
include payroll services and more involved arrangements where
Headway assumes some or all of the administrative functions of
employment on-site at the client's business, which is commonly
referred to as "vendor-on-premises". Headway offers
IT/professional staff services in which accountants, computer
programmers and technicians, desktop publishing operators,
network administrators, and computer graphic specialists are
placed on a temporary, contract, or permanent basis. Executive
search services focuses on placing middle to upper level
management positions and permanent placement involves placement
of office/clerical and IT/professional personnel. Headway offers
contract
16
<PAGE>
staff administration services where it assumes the position of
employer for long-term contingent workers used frequently by
clients and manages the scheduling of these contingent workers to
make them available to service clients' needs.
Headway's goal is to build a national staffing business
focused on providing these services with an emphasis in the
financial services industry as well as other identified
industries. Headway's strategy for achieving this goal is to
make acquisitions, to emphasize programs that generate internal
growth and to continue to conduct operations through a
decentralized "Hub-Spoke" management model. Headway will seek
strategic acquisitions specifically looking for fold-ins to
existing hub operations in order to strengthen and add to
existing business lines as well as continue the diversification
program.
1999
In 1999, Headway focused its attention on integration of the
acquisitions completed over the past three years, internal growth
and improving operating efficiencies as well as beginning a
diversification program outside of the financial services
industry. Headway slowed down the pace of new acquisitions,
completing two during the year. In 1999, Headway experienced
internal growth of 10% while achieving record revenues, net
income and earnings per share before non-recurring items.
In March 1999, Headway bought out the employment agreement
of the vice chairman and executive vice president of Headway
Corporate Staffing Services, a wholly owned subsidiary. In
connection with this termination, Headway incurred a non-
recurring pre-tax charge of $2.3 million or $1.4 million after
tax in the first quarter of 1999. Headway has and expects to
realize cost savings in the future as a result of this
transaction.
In June 1999, Headway acquired substantially all of the
assets of the Resource Management division of Nine Rivers
Technology Corporation, with offices in Florida, Texas and North
Carolina. The acquired offices were folded into existing Headway
locations in North Carolina, Florida and Texas. The acquired
division of Nine Rivers is engaged in the business of offering
temporary information technology staffing services.
In June 1999, Headway expanded its senior credit facility
from $90 million to $100 million.
In November 1999, Headway acquired all of the outstanding
capital stock of Tyzack, the oldest established executive search
firm in the UK with offices in London and Leeds. While Tyzack
performs executive search for financial services companies, it
also provides search services in other industries such as; e-
commerce, media and entertainment, consumer goods, information
technology and telecommunications. The addition of Tyzack is
expected to provide Headway with a platform to continue to
diversify revenues outside of financial services.
1998
In 1998 Headway continued to execute its strategy of
becoming a full service provider of human resource management and
staffing services. Headway completed seven acquisitions and
expanded into four new markets during the year. In 1998, Headway
experienced internal growth of 38% while achieving record
revenues, net income and earnings per share.
In March 1998, Headway acquired substantially all of the
assets of the Southern Virginia offices of Select Staffing
Services Inc., a provider of temporary services. The offices are
located in Richmond, Virginia Beach and Hampton, Virginia.
17
<PAGE>
In March 1998, Headway acquired substantially all of the
assets of Cheney Associates and Cheney Consulting Group of New
Haven, Connecticut engaged in the business of offering permanent
and temporary information technology staffing services primarily
in Connecticut.
In March 1998, Headway acquired all of the outstanding
capital stock of Shore Resources, Incorporated of Los Angeles,
California. With offices in Newport Beach and Lake Forest, Shore
is engaged in the business of offering temporary and permanent
staffing, primarily in Southern California.
In June 1998, Headway acquired substantially all of the
assets of Staffing Solutions, Inc. and Intelligent Staffing,
Inc., both Florida corporations (collectively "SSI") in a single
transaction. SSI is engaged in the business of providing
clerical temporary and permanent staffing principally in Southern
Florida.
In June 1998, Headway acquired substantially all of the
assets of Phoenix Communication Group, Inc. of N.J. Phoenix is
engaged in the business of offering information technology
temporary and permanent staffing services. The principal offices
of Phoenix are located in Woodbridge, New Jersey.
In July 1998, Headway acquired all of the outstanding
capital stock of Carlyle Group, Ltd. ("Carlyle"). With principal
offices in Chicago, Illinois, Carlyle is an executive search firm
specializing in real estate and management consulting search
assignments.
In November 1998, Headway acquired substantially all of the
assets of Staffing Alternatives International, Inc. and VSG
Consulting, Inc. in a single transaction. The two companies
provide information technology staffing services in the Dallas,
Texas area.
During 1998, Headway realized an after tax gain of $595,000
on the sale of its remaining investment in Incepta.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenue increased $69.4 million to $360.7 million for the
year ended December 31, 1999, from $291.3 million for the year
ended December 31, 1998. The increase in revenue for 1999 is
attributable to a full year of results from the acquisitions
completed during 1998 as well as the results from the two
acquisitions completed during 1999. Headway experienced internal
growth in 1999 of 10%, as a result of a very strong performance
in the executive search business offset by a severe but short-
lived decline in the information technology staffing business due
to Year 2000 concerns.
Whitney, the executive search segment contributed $26
million to consolidated revenues in 1999, an increase of $6.2
million from $19.8 million in 1998. This increase is due to the
continued strong demand for new hires in the financial services
industry, the full year results from Carlyle, and the
contribution that Tyzack made since its acquisition in November
1999.
Total operating expenses increased $67.9 million to $344.4
million for 1999 from $276.6 million for 1998. Of the increase,
$49.4 million relates to the increase in direct costs that are
the wages, taxes and benefits of work-site employees of the
staffing companies. Direct costs decreased as a percentage of
revenues to 76.1% in 1999 from 77.2% in 1998. This decrease is
the result of increased revenue from the executive search
business that has no direct costs. Of the increase in operating
expenses, $2.3 million relates to the termination payment made to
the former vice chairman and executive vice president of our
subsidiary, Headway Corporate Staffing Services. The balance of
the increase in operating expenses
18
<PAGE>
relates to the increased commissions due to higher revenues and
the full year of expenses of the companies acquired in 1998 as
well as the partial year expenses of the 1999 acquisitions.
Whitney's operating expenses increased $3.6 million to $18.9
million for the year ended December 31, 1999 as compared to $15.3
million for the same period last year. The increase relates
primarily to the increased commissions related to the higher
executive revenues as well as the full year of operating expenses
of Carlyle and the two months of expenses for Tyzack.
Net income from continuing operations before extraordinary
item decreased $834,000 to $5.8 million for the year ended
December 31, 1999 compared to $6.6 million for the year ended
December 31, 1998. Included in the results for 1999 is an after
tax charge of $1.4 million related to the termination payment
made to the former vice chairman and executive vice president of
our subsidiary. Included in the results for 1998 is an after tax
gain of $595,000 on the sale of Headway's investment in Incepta.
Net income was $5.1 million for the year ended December 31, 1998
after an extraordinary loss after tax of $1.6 million on early
retirement of debt.
Headway's operations were not significantly impacted by
inflation during the years ended December 31, 1999 and 1998, and
it is not anticipated that inflation will have any significant
impact on our results of operations for at least the next year.
Years Ended December 31, 1998 and 1997
Revenue increased $148.5 million to $291.3 million for the
year ended December 31, 1998, from $142.8 million for the year
ended December 31, 1997. The increase in revenue for 1998 is
attributable to a full year of results from the acquisitions
completed during 1997 as well as the seven acquisitions completed
during 1998. In addition, Headway experienced internal growth in
1998 of 38%, as a result of the continued dependence by our
customers on the use of contingent workers.
Whitney contributed $19.8 million to consolidated revenues
in 1998, an increase of $2.3 million from $17.5 million in 1997.
This increase is due to the continued strong performance in the
financial services industry and the related increase in the
hiring activities of Whitney's clients, and the contribution that
Carlyle made since its acquisition in July 1998. During the
fourth quarter however, the financial markets experienced a short-
term crisis. This resulted in lower fourth quarter revenues than
was expected. The downturn turned out to be short-lived as
revenue picked up by the end of the quarter.
Total operating expenses increased $141.1 million to $276.6
million for 1998 from $135.4 million for 1997. Of the increase,
$120.6 million relates to the increase in direct costs that are
the wages, taxes and benefits of work-site employees of the
staffing companies. Direct costs increased as a percentage of
revenues to 77.2% in 1998 from 73.1% in 1997. The increase
primarily reflects Headway's changing mix of business.
Specifically, the executive search business that has no direct
costs was a smaller percentage of our revenues. The balance of
the increase in operating expenses relates to the acquisitions of
the staffing companies in late 1997 and 1998.
Whitney's operating expenses increased $744,000 to $15.3
million for the year ended December 31, 1998 as compared to $14.6
million for the same period last year. The increase relates
primarily to the operating expenses of Carlyle.
Net income from continuing operations before extraordinary
item increased $814,000 to $6.6 million for the year ended
December 31, 1998 compared to net income from continuing
operations of $5.8 million for the year ended December 31, 1997.
Included in the results for 1998 and 1997 is an after tax gain of
$595,000 and $2.8 million respectively on the sale of Headway's
investment in Incepta. In
19
<PAGE>
addition, the 1997 results include a reversal of a loan reserve
of $405,000 after tax. Net income was $5.1 million for the year
ended December 31, 1998 after an extraordinary loss after tax of
$1.6 million on early retirement of debt. This compares to net
income of $2.8 million for 1997, which includes losses after tax
from discontinued operations of $3 million.
Headway's operations were not significantly impacted by
inflation during the years ended December 31, 1998 and 1997.
Liquidity and Capital Resources
Net cash provided by operating activities was $7.7 million
in 1999. This is primarily due to net income of $5.8 million and
depreciation and amortization expenses of $4.8 million offset by
an increase in accounts receivable of $4.6 million attributable
to the higher level of revenue in 1999. In 1998 cash provided by
operating activities of $124,000 was primarily the result of net
income and depreciation and amortization expenses offset by an
increase in accounts receivable due to new acquisitions and
internal growth.
Total cash used in investing activities of $19 million in
1999 and $42.7 million in 1998 was primarily the result of the
acquisitions completed during 1999, 1998 and prior years, and
purchases of property and equipment. The 1998 cash used in
investing activities was partially offset by the proceeds of the
sale of Headway's investment in Incepta Group PLC.
Total cash generated from financing activities was $9.0
million for 1999, compared to $44.3 million generated from
financing activities in fiscal 1998. Cash from financing
activities in 1999 was due to increases in borrowings on
Headway's senior credit facility and proceeds from the exercise
of stock options offset in part by purchases of treasury stock
and preferred stock dividends paid. Cash from financing
activities in 1998 was primarily related to the net proceeds from
the financing completed in March 1998.
In September 1998, Headway announced that its Board of
Directors had authorized a stock repurchase program of up to 1.0
million shares. In 1999, Headway spent $2.9 million to
repurchase approximately 612,900 shares. In 1998, Headway spent
$290,000 to repurchase approximately 57,200 shares.
In March 1998, Headway completed a financing for $105
million a portion of which was used to refinance existing debt,
for acquisitions completed during 1998 and for general working
capital. This was subsequently increased to $130 million. At
December 31, 1999, Headway had approximately $35.9 million
available under its senior credit facility.
At December 31, 1999 Headway had working capital of $30.6
million compared to working capital of $32.1 million at December
31, 1998. Estimated cash earnout payments to be made in 2000 are
$9 million of which $3.9 million was earned in 1999 and is
included in current liabilities at December 31, 1999. Management
estimates that cash flow from operations in 1999 as well as the
availability under the existing credit facility will be
sufficient for meeting payment obligations and working capital
needs as they arise.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. In
June 1999, the FASB issued Statement No. 137, which delayed the
adoption date by one year to June 15, 2000. The
20
<PAGE>
Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. Headway expects to adopt the
new Statement effective January 1, 2001. The Statement will
require Headway to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of the derivative will either be offset against the change in
fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be
immediately recognized in earnings. Headway does not anticipate
that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
Impact of Year 2000
In prior years, Headway discussed the nature of its plans
related to Year 2000 compliance. As a result of those planning
efforts, Headway experienced no significant disruptions in
mission critical information technology and non-information
technology systems and believes those systems successfully
responded the Year 2000 date change. The costs associated with
Year 2000 compliance was nominal. Headway is not aware of any
material problems resulting from Year 2000 issues with its
internal systems or the services of third parties. Headway will
continue to monitor its mission critical computer applications
and those of its supplier and vendors throughout the year to
ensure that any latent Year 2000 matters that may arise are
addressed properly.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1985
provides a safe harbor for forward-looking statements made by
Headway. All statements, other than statements of historical
fact, which address activities, actions, goals, prospects, or new
developments that Headway expects or anticipates will or may
occur in the future, including such things as expansion and
growth of Headway's operations and other such matters are forward-
looking statements. Any one or a combination of factors could
materially affect Headway's operations and financial condition.
These factors include competitive pressures, the availability of
new acquisitions on terms acceptable to Headway, changes in the
performance of the financial services industry or the economy,
legal and regulatory initiates affecting temporary employment,
and conditions in the capital markets. Forward-looking
statements made by Headway are based on knowledge of its business
and the environment in which it operates as of the date of this
report. Because of the factors listed above, as well as other
factors beyond its control, actual results may differ from those
in the forward-looking statement
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Headway is exposed to changes in interest rates primarily
from its long-term debt arrangements. Under its current
policies, Headway uses interest rate derivative instruments to
manage exposure to interest rate changes. As of December 31,
1999, Headway had two interest rate exchange agreements
converting $40 million of variable rate borrowings under the
senior credit agreement to a fixed rate of 7.2% per annum plus
the applicable margin, expiring in 2000.
Headway is exposed to credit loss in the event of
nonperformance by the counterparty, a large financial
institution. However, Headway does not anticipate nonperformance
by the counterparty.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data
of Headway appear at the end of this report beginning with the
Index to Consolidated Financial Statements on page F-1.
21
<PAGE>
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
There were no changes in or disagreements with Headway's
independent auditors during the preceding two calendar years.
PART III
The information required by each of the Items listed below
is incorporated herein by reference to the definitive proxy
statement of Headway for the 2000 annual meeting of stockholders,
which Headway proposes to file with the Securities and Exchange
Commission on or before April 29, 2000:
Information required by "Item 10. Directors and Executive
Officers of the Registrant," is incorporated by reference to the
proposed caption "Directors and Executive Officers" in the proxy
statement;
Information required by "Item 11. Executive Compensation,"
is incorporated by reference to the proposed caption "Executive
Compensation" in the proxy statement;
Information required by "Item 12. Security Ownership of
Certain Beneficial Owners and Management," is incorporated by
reference to the proposed caption "Security Ownership of
Management and Principal Stockholders" in the proxy statement;
and
Information required by "Item 13. Certain Relationships and
Related Transactions," is incorporated by reference to the
proposed caption "Certain Relationships and Related Transactions"
in the proxy statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Financial Statements and Financial Statement Schedules
The information required by this subsection of this item is
presented in the index to the financial statements on page F-1.
Reports on Form 8-K
No reports on Form 8-K were filed by Headway during the last
calendar quarter of 1999.
22
<PAGE>
Exhibits
Copies of the following documents are included as exhibits
to this report pursuant to Item 601 of Regulation S-K.
Exhibit SEC Ref. Title of Document Location
No. No.
1 (3)(I) Certificate of Incorporation (2) 1996 Fm10-K
Ex. No. 1
2 (3)(ii) By-Laws (2) 1996 Fm10-K
Ex. No. 2
3 (3)(ii) By-Law Amendments (1) Apr/Fm8-K
Ex. No. 5
4 (4) Series F Preferred Stock Apr/Fm8-K
Designation (1) Ex. No. 4
5 (4) Securities Purchase Agreement Apr/Fm8-K
dated March 19, 1998 (1) Ex. No. 6
6 (4) Registration Rights Agreement Apr/Fm8-K
dated March 19, 1998 (1) Ex. No. 7
7 (4) Indenture dated March 19, 1998 (1) Apr/Fm8-K
Ex. No. 8
8 (4) Form of Senior Subordinated Note (1) Apr/Fm8-K
Ex. No. 9
9 (4) Guaranty Agreement dated March Apr/Fm8-K
19, 1998 (1) Ex. No. 10
10 (4) Credit Agreement dated March 19, Apr/Fm8-K
1998 including Exhibit A - Ex. No. 11
Commitment Percentage, and
Exhibit F - Form of
Revolving Note (1)
11 (4) Guaranty Agreement dated March 19, Apr/Fm8-K
1998 (1) Ex. No. 12
12 (4) Security Agreement dated March 19, Apr/Fm8-K
1998 (1) Ex. No. 13
13 (4) Pledge Agreement dated March 19, Apr/Fm8-K
1998 (1) Ex. No. 14
23
<PAGE>
14 (4) LC Account Agreement dated Apr/Fm8-K
March 19, 1998 (1) Ex. No. 15
15 (4) Intellectual Property Security Apr/Fm8-K
Agreement dated March 19, Ex. No. 16
1998 (1)
16 (21) Subsidiaries of Headway This Filing
Page E-1
17 (23) Consent of Ernst & Young LLP This Filing
Page E-2
18 (27) Financial Data Schedule (3)
- --------------------------
(1) These exhibit are included in Headway's current report on
Form 8-K, dated March 19, 1998, and filed with the Commission on
April 3, 1998, and is incorporated herein by this reference. The
reference under the column "Location" is to the exhibit number in
the report on Form 8-K.
(2) These exhibits are included in Headway's annual report on
Form 10-KSB, for the fiscal year ended December 31, 1996, and
filed with the Securities and Exchange Commission on March 27,
1997, and are incorporated herein by this reference. The
reference under the column "Location" is to the exhibit number in
the report on Form 10-KSB.
(3) The Financial Data Schedule for the year ended December 31,
1999, is presented only in the electronic filing with the
Securities and Exchange Commission.
24
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Headway Corporate Resources, Inc.
Date: March 24, 2000 By: /s/ Barry S. Roseman, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: March 24, 2000 /s/ Gary S. Goldstein, Principal Executive
Officer and Director
Dated: March 24, 2000 /s/ Barry S. Roseman Principal Financial
and Accounting Officer and Director
Dated: March 24, 2000 /s/ G. Chris Andersen, Director
Dated: March 29, 2000 /s/ E. Garrett Bewkes, III, Director
Dated: March 24, 2000 /s/ Bruce R. Ellig, Director
Dated: March 20, 2000 /s/ Ehud D. Laska, Director
Dated: March 20, 2000 /s/ Richard B. Salomon, Director
25
<PAGE>
Form 10-K Item 14 (a) (1) and (2)
Headway Corporate Resources, Inc. and Subsidiaries
List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Headway
Corporate Resources, Inc. and Subsidiaries are included in
Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-9
The following consolidated financial statement schedule of
Headway Corporate Resources, Inc. and Subsidiaries is
included in Item 14 (a) (2):
Schedule II - Valuation and Qualifying Accounts F-29
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
Headway Corporate Resources, Inc.
We have audited the accompanying consolidated balance sheets
of Headway Corporate Resources, Inc. and Subsidiaries (the
"Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14 (a). These
financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based
on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of Headway Corporate
Resources, Inc. and Subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. Also, in
our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 21, 2000
F-2
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,867 $ 4,157
Accounts receivable, trade, net of allowance for doubtful accounts of 53,555 47,017
$958 (1999) and $593 (1998)
Prepaid expenses and other current assets 990 954
Prepaid income taxes - 1,217
---------------------
Total current assets 56,412 53,345
Property and equipment, net 5,601 4,566
Intangibles, net of accumulated amortization of $6,908 (1999) 83,872 66,388
and $3,628 (1998)
Deferred financing costs 1,546 1,757
Other assets 988 890
---------------------
Total assets $ 148,419 $ 126,946
_____________________
---------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,389 $ 2,190
Accrued expenses 3,215 2,969
Accrued payroll 14,241 13,492
Capital lease obligations, current portion 435 416
Long-term debt, current portion 152 150
Income taxes payable 533 -
Earnout payable 3,861 1,989
Other liabilities 1,020 -
---------------------
Total current liabilities 25,846 21,206
Capital lease obligations, less current portion 523 755
Long-term debt, less current portion 72,750 60,959
Deferred rent 1,246 1,251
Deferred income taxes 53 204
Commitments and contingencies
Stockholder's equity:
Preferred stock-$.0001 par value, 5,000,000 shares authorized:
Series F, convertible preferred stock-$.0001 par value, 1,000 shares
authorized, 1,000 shares issued and outstanding at December 31, 1999
and 1998, respectively (aggregate liquidation value $20,000) 20,000 20,000
Common stock-$.0001 par value, 20,000,000 shares authorized,
11,372,561 shares and 10,702,461 shares issued and outstanding,
respectively, at December 31, 1999; 10,419,220 shares and
10,362,020 shares issued and outstanding, respectively, at
December 31, 1998 1 1
Additional paid-in capital 19,820 15,779
Treasury stock, at cost (3,191) (290)
Note receivable (126) (172)
Deferred compensation (440) -
Retained earnings 11,929 7,244
Other comprehensive income 8 9
---------------------
Total stockholders' equity 48,001 42,571
---------------------
Total liabilities and stockholders' equity $ 148,419 $ 126,946
_____________________
---------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Revenues $ 360,742 $ 291,303 $ 142,842
Operating expenses:
Direct costs 274,360 224,993 104,396
Selling, general and administrative 63,349 48,638 29,588
Termination of employment contract 2,329 - -
Depreciation and amortization 4,411 2,952 1,453
----------------------------------
344,449 276,583 135,437
----------------------------------
Operating income from continuing operations 16,293 14,720 7,405
Other (income) expenses:
Interest expense 6,331 4,515 2,662
Interest income (122) (152) (104)
Gain on sale of investment - (901) (4,272)
Other income, net - - (750)
----------------------------------
6,209 3,462 (2,464)
----------------------------------
Income from continuing operations before income tax expense 10,084 11,258 9,869
Income tax expense 4,299 4,639 4,064
Income from continuing operations 5,785 6,619 5,805
Discontinued operations:
Loss from operations of discontinued segment
(net of income tax benefit of $95) - - (301)
Loss on disposal of segment (net of income tax
benefit of $117) - - (2,698)
----------------------------------
Loss from discontinued operations - - (2,999)
----------------------------------
Net income before extraordinary item 5,785 6,619 2,806
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $1,141) - (1,557) -
----------------------------------
Net income 5,785 5,062 2,806
Preferred dividend requirements (1,100) (866) (137)
----------------------------------
Net income available for common stockholders $ 4,685 $ 4,196 $ 2,669
__________________________________
----------------------------------
Basic earnings (loss) per common share:
Continuing operations $ .46 $ .58 $ .79
Discontinued operations - - (.42)
Extraordinary item - (.15) -
----------------------------------
Net income $ .46 $ .43 $ .37
__________________________________
----------------------------------
Diluted earnings (loss) per common share:
Continuing operations $ .40 $ .47 $ .58
Discontinued operations - - (.30)
Extraordinary item - (.11) -
----------------------------------
Net income $ .40 $ .36 $ .28
__________________________________
----------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands, except share data)
<TABLE>
<CAPTION>
Series A, B, C and D Series F
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
----------------- ------------------ ------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,700 $ 5,050 - $ - 6,301,448 $ 1
Conversion of preferred stock (9,124) (4,650) - - 2,565,775 -
Retirement of treasury stock - - - - (83,462) -
Repayment of notes receivable - - - - - -
Issuance of stock for acquisition - - - - 121,066 -
Exercise of options and warrants - - - - 2,283 -
Fair value of warrants issued - - - - - -
Preferred stock dividends - - - - - -
Translation adjustments - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
------------------------------------------------------------
Balance at December 31, 1997 576 400 - - 8,907,110 1
Issuance of preferred stock - - 1,000 20,000 - -
Conversion of preferred stock (576) (400) - - 114,540 -
Repayment of notes receivable - - - - - -
Issuance of stock for acquisitions - - - - 175,488 -
Exercise of options and warrants - - - - 1,222,082 -
Preferred stock dividends - - - - - -
Treasury stock - - - - - -
Translation adjustment - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
----------------------------------------------------
Balance at December 31, 1998 - - 1,000 20,000 10,419,220 1
Repayment of notes receivable - - - - - -
Issuance of stock for acquisitions - - - - 425,110 -
Exercise of options - - - - 403,231 -
Issuance of common stock to an
officer for services - - - - 125,000 -
Amortization of stock-based
compensation - - - - - -
Preferred stock dividends - - - - - -
Treasury stock - - - - - -
Translation adjustment - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
------------------------------------------------------------
Balance at December 31, 1999 - $ - 1,000 $ 20,000 11,372,561 $ 1
____________________________________________________________
------------------------------------------------------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands, except share data)
<TABLE>
<CAPTION>
Additional
Paid-in Treasury Stock Notes Deferred
-------------------------------
Capital Shares Amount Receivable Compensation
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 8,371 - $ - $ (457) $ -
Conversion of preferred stock 4,799 - - - -
Retirement of treasury stock (438) - - - -
Repayment of notes receivable - - - 172 -
Issuance of stock for acquisition 500 - - - -
Exercise of options and warrants 5 - - - -
Fair value of warrants issued 10 - - - -
Preferred stock dividends - - - - -
Translation adjustments - - - - -
Net income - - - - -
Comprehensive income - - - - -
------------------------------------------------------
Balance at December 31, 1997 13,247 - - (285) -
Issuance of preferred stock (1,367) - - - -
Conversion of preferred stock 400 - - - -
Repayment of notes receivable - - - 113 -
Issuance of stock for acquisitions 1,233 - - - -
Exercise of options and warrants 2,266 - - - -
Preferred stock dividends - - - - -
Treasury stock - (57,200) (290) - -
Translation adjustment - - - - -
Net income - - - - -
Comprehensive income - - - - -
------------------------------------------------------
Balance at December 31, 1998 15,779 (57,200) (290) (172) -
Repayment of notes receivable - - - 46 -
Issuance of stock for acquisitions 1,969 - - - -
Exercise of options 1,597 - - - -
Issuance of common stock to an
officer for services 475 - - - (475)
Amortization of stock-based
compensation - - - - 35
Preferred stock dividends - - - - -
Treasury stock - (612,900) (2,901) - -
Translation adjustment - - - - -
Net income - - - - -
Comprehensive income - - - - -
------------------------------------------------------
Balance at December 31, 1999 $ 19,820 (670,100) $ (3,191) $ (126) $(440)
______________________________________________________
------------------------------------------------------
See accompanying notes.
F-6
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Dollars in Thousands)
Other Total
Retained Comprehensive Stockholders'
Earning Income Equity
Balance at December 31, 1996 $ 379 $ 80 $ 13,424
Conversion of preferred stock - - 149
Retirement of treasury stock - - (438)
Repayment of notes receivable - - 172
Issuance of stock for acquisition - - 500
Exercise of options and warrants - - 5
Fair value of warrants issued - - 10
Preferred stock dividends (137) - (137)
Translation adjustments - (39) (39)
Net income 2,806 - 2,806
Comprehensive income - - 2,767
-------------------------------------
Balance at December 31, 1997 3,048 41 16,452
Issuance of preferred stock - - 18,633
Conversion of preferred stock - - -
Repayment of notes receivable - - 113
Issuance of stock for acquisitions - - 1,233
Exercise of options and warrants - - 2,266
Preferred stock dividends (866) - (866)
Treasury stock - - (290)
Translation adjustment - (32) (32)
Net income 5,062 - 5,062
Comprehensive income - - 5,030
-------------------------------------
Balance at December 31, 1998 7,244 9 42,571
Repayment of notes receivable - - 46
Issuance of stock for acquisitions - - 1,969
Exercise of options - - 1,597
Issuance of common stock to an
officer for services - - -
Amortization of stock-based
compensation - - 35
Preferred stock dividends (1,100) - (1,100)
Treasury stock - - (2,901)
Translation adjustment - (1) (1)
Net income 5,785 - 5,785
Comprehensive income - - 5,784
-------------------------------------
Balance at December 31, 1999 $ 11,929 $ 8 $ 48,001
_____________________________________
-------------------------------------
See accompanying notes.
F-7
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year ended December
31
1999 1998 1997
Operating activities
Net income $ 5,785 $ 5,062 $ 2,806
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of investment - (901) (4,272)
Loss on disposal of segment - - 2,698
Depreciation and amortization, including deferred financing costs 4,798 3,354 2,253
Amortization of deferred compensation 35 - -
Provision for bad debt 504 427 249
Deferred income taxes 513 379 475
Loss on early extinguishment of debt - 1,557 -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (4,584) (13,853) (14,720)
Prepaid expenses and other current assets (36) (548) 54
Other assets (98) (148) 264
Accounts payable and accrued expenses (425) 752 1,211
Accrued payroll 749 4,657 4,222
Income taxes payable 500 (718) (568)
Deferred rent (5) 104 -
Changes in working capital related to discontinued operations - - (480)
----------------------------
Net cash provided by (used in) operating activities 7,736 124 (5,808)
----------------------------
Investing activities
Expenditures for property and equipment (1,919) (1,759) (695)
Repayment from notes receivable 46 113 172
Advances to related parties - 638 -
Proceeds from sale of investment - 3,178 4,363
Cash paid for acquisitions (17,164) (44,863) (16,512)
Other assets - - (42)
----------------------------
Net cash used in investing activities (19,037) (42,693) (12,714)
Financing activities
Net change in revolving credit line 11,950 (13,404) 9,554
Proceeds from long-term debt - 60,800 14,352
Repayment of long-term debt (157) (20,605) (2,641)
Payment of capital lease obligations (213) (246) (136)
Payments of loan acquisition fees (176) (2,003) (1,051)
Sale of preferred stock, net - 18,633 -
Proceeds from exercise of options 1,597 2,266 -
Purchase of treasury stock (2,901) (290) -
Cash dividends paid (1,100) (866) (53)
----------------------------
Net cash provided by financing activities 9,000 44,285 20,025
Effect of exchange rate changes on cash and cash equivalents 11 (31) (39)
----------------------------
(Decrease) increase in cash and cash equivalents (2,290) 1,685 1,464
Cash and cash equivalents at beginning of year 4,157 2,472 1,008
----------------------------
Cash and cash equivalents at end of year $ 1,867 $ 4,157 $ 2,472
____________________________
----------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 5,901 $ 3,736 $ 2,016
Income taxes $ 3,176 $ 5,129 $ 2,870
Supplemental disclosure of noncash investing and financing activities
In December 1997, an officer sold 83,462 shares of common
stock valued at $438,000 to the Company which was used to
reduce amounts due to the Company from this individual.
In July 1999, the Company issued common stock valued at
$475,000 for services. In 1999, 1998 and 1997, the Company
issued 425,110, 175,488 and 121,066 shares of its common
stock valued at $1,969,000, $1,233,000 and $500,000,
respectively, for acquisitions.
In 1999 and 1998, the Company purchased property and
equipment under capital leases amounting to approximately
$198,000 and $900,000, respectively.
See accompanying notes.
F-8
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization
Headway Corporate Resources, Inc. and its wholly-owned
subsidiaries (the "Company") provide strategic staffing
solutions and personnel worldwide. Its operations include
information technology staffing, temporary staffing,
contract staffing, permanent placement and executive search.
Headquartered in New York, the Company has offices in
California, Connecticut, Florida, New Jersey, North
Carolina, Virginia, and Texas and executive search offices
in New York, Illinois, the United Kingdom, Japan, Hong Kong
and Singapore.
In December 1997, the Company sold its wholly-owned
subsidiary, Furash & Company, Inc. ("FCI"), which was
engaged in providing management and consulting advisory
services. The disposal of FCI was accounted for as a
discontinued operation.
In 1999, 1998 and 1997, the Company purchased the stock or
certain assets of several temporary staffing companies and
executive search firms (see Note 6).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts
of Headway Corporate Resources, Inc. and its subsidiaries
after elimination of all intercompany accounts and
transactions.
Revenue Recognition
Information technology staffing, temporary staffing and
contract staffing revenue is recognized when the temporary
personnel perform the related services, and revenue from
permanent placement services is recognized when the
placement is employed.
Executive search services are primarily engaged on a
retainer basis. Income from retainer contracts which provide
for periodic billings over periods of up to one year, is
recognized as earned based on the terms of the contract.
Cash Equivalents
Cash equivalents are comprised of certain highly liquid
investments with a maturity of three months or less when
purchased.
F-9
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed utilizing the straight-line method over the
estimated useful lives of the assets which range from three
to seven years. Leasehold improvements are amortized
utilizing the straight-line method over the lesser of the
useful life of the leasehold or the term of the lease.
Deferred Rent
The Company leases premises under leases which provide for
periodic increases over the lease term. Pursuant to
Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," the Company records rent expense on
a straight-line basis. The effect of these differences is
recorded as deferred rent.
Deferred Taxes
The Company provides for deferred taxes pursuant to
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the
recognition of deferred taxes utilizing the liability
method.
Foreign Currency Translation
Balance sheet accounts of the Company's United Kingdom and
Asian subsidiaries are translated using year-end exchange
rates. Statement of operations accounts are translated at
monthly average exchange rates. The resulting translation
adjustment is reported as other comprehensive income in
stockholders' equity.
Goodwill
Goodwill is amortized utilizing the straight-line method
over a period of 20 to 30 years. The Company periodically
evaluates the carrying value and the periods of amortization
of goodwill based on the current and expected future non-
discounted income from operations of the entities giving
rise to the goodwill to determine whether events and
circumstances warrant revised estimates of carrying value or
useful lives.
F-10
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred Financing Costs
Deferred financing costs are amortized utilizing the
straight-line method over the term of the related debt.
Concentration of Credit Risk
Financial instruments that potentially subject the Company
to concentration of credit risk include cash and cash
equivalents and accounts receivable arising from its normal
business activities. The Company places its cash and cash
equivalents with high credit quality financial institutions.
The Company believes that its credit risk regarding accounts
receivable is limited due to the large number of entities
comprising the Company's customer base. In addition, the
Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit
risk of its customers, establishes an allowance for
uncollectible accounts, where appropriate and, as a
consequence, believes that its accounts receivable credit
risk exposure is limited.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States requires management to make estimates and assumptions
that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from
those estimates.
Segment Information
The Company reports segment information in accordance with
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises
report information about operating segments in annual
financial statements and requires that those enterprises
report selected information about operating segments in
interim financial reports. Statement 131 also establishes
standards for related disclosures about products and
services, geographic areas, and major customers (see Note
14).
F-11
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair
value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations because the Company
believes the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Recent Pronouncements
Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards
for derivative instruments, including derivative instruments
embedded in other contracts and for hedging activities. This
statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000 and is not expected to
have a significant impact on the Company's financial
position or results of operations.
3. Property and Equipment
Property and equipment consists of the following:
December 31
1999 1998
Leasehold improvements $1,425,000 $1,248,000
Furniture and fixtures 1,692,000 1,537,000
Office and computer equipment 5,578,000 3,730,000
------------------------
8,695,000 6,515,000
Less accumulated depreciation and amortization 3,094,000 1,949,000
------------------------
$5,601,000 $4,566,000
________________________
------------------------
F-12
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Due from Related Parties and Related Party Transactions
In July 1999, the Company granted 125,000 shares of common
stock to the Company's Chairman that vests at the earlier of
i) the Company's common stock price reaching a certain
level, as defined, or ii) on July 1, 2006. Such shares were
valued at $475,000 and are being amortized on a straight-
line basis through July 1, 2006.
In December 1997, the Chairman repaid approximately $290,000
of amounts due from him. The remaining $638,000 due from him
as of December 31, 1997 was repaid on March 3, 1998.
Accordingly, in 1997, a $750,000 reserve against such
receivable previously established in 1992 was reversed, and
is included in other income.
In 1998, financial advisory services were provided to the
Company by entities in which a director of the Company was a
principal. Amounts paid for such services amounted to
$147,000 and was related to an acquisition made by the
Company.
During the years ended December 31, 1999, 1998 and 1997, the
Company incurred fees of approximately $304,000, $615,000
and $282,000, respectively, for legal services to an entity,
whose partner is a member of the Board of Directors.
5. Long-Term Debt and Credit Facilities
Under the terms of a credit agreement entered into in May
1996, the Company obtained a revolving line of credit of
$6,000,000 and a term loan of $9,000,000. In 1997,
amendments were made to the credit agreement resulting in
three term loans with principal balances of $7,675,000,
$7,360,000 and $5,425,000 as of December 31, 1997 and an
increase in the Company's revolving line of credit to
$17,000,000. In 1998, the Company retired the balance
outstanding under the credit facility with the proceeds of a
new financing (see below) and incurred an extraordinary loss
on the early retirement of this credit facility of
$1,557,000.
In March 1998, the Company completed a financing totaling
$105,000,000 consisting of a $75,000,000 senior credit
facility, $10,000,000 of senior subordinated notes, and
$20,000,000 of Series F Convertible Preferred Stock (see
Note 7). In October 1998, the senior credit facility was
increased to $90,000,000 and, in June 1999, further
increased to $100,000,000.
F-13
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Credit Facilities (continued)
The amount that can be borrowed under the senior credit
facility is reduced to $95,000,000 in March 2001 and to
$85,000,000 in March 2002. This credit facility expires in
2003 and bears interest at varying rates based on LIBOR
ranging from 6.90% to 8.49% per annum at December 31, 1999.
The Company incurred expenses in connection with the
issuance of the senior credit facility of approximately
$1,410,000, which have been deferred and are being amortized
over the five year term of the senior credit facility. As of
December 31, 1999, $62,750,000 was outstanding under the
senior credit facility. The carrying amount of the
borrowings under the senior credit facility approximates
fair value. Substantially all assets of the Company have
been pledged as collateral for the senior credit facility.
In addition, the Company is required to meet certain
financial ratios, as defined.
The senior subordinated notes are payable in March 2006 and
bear interest at 12% per annum until March 2001, increasing
to 14% per annum thereafter. The Company incurred expenses
in connection with the issuance of the senior subordinated
notes of approximately $767,000 which have been deferred and
are being amortized over the eight year term of the senior
subordinated notes. The fair value of the senior
subordinated notes was approximately $9,750,000 at December
31, 1999 and was estimated using discounted cash flows based
on the Company's incremental borrowing rate for similar
types of borrowing arrangements.
In connection with an acquisition made in July 1997, the
Company entered into a $451,000 note payable to the seller.
This note is payable in six equal semi-annual installments
commencing in January 1998 and bears interest at 6% per
annum. At December 31, 1999, approximately $152,000 of the
note payable is outstanding.
Annual maturities of long-term debt as of December 31, 1999
are approximately as follows:
Years ending December 31:
2000 $ 152,000
2001 -
2002 -
2003 62,750,000
2004 -
Thereafter 10,000,000
-----------
$72,902,000
___________
-----------
F-14
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Credit Facilities (continued)
As of December 31, 1999 and 1998, the Company had two
interest rate exchange agreements converting $40,000,000
(notional amount) of variable rate borrowings under the
senior credit agreement to a fixed rate. At December 31,
1998, such contracted fixed rate was 5.42% per annum plus
the applicable margin. In January 1999, the terms of the
agreement were revised to reduce the fixed interest rate to
5.20% per annum plus the applicable margin, and to provide
an option to the counterparty to extend the term of the
exchange agreements to 2001. The notional amount does not
represent amounts exchanged by the parties and is not a
measure of the exposure to the Company through its use of
derivatives. The term of the exchange agreements expire in
September and October 2000. The fair value of the interest
rate exchange agreements based on a notional amount of
$40,000,000 and other terms of the agreements, was
calculated based on the buyback value of such exchange
agreements and amounted to approximately $323,000 and
$(355,000), respectively, at December 31, 1999 and 1998. The
Company is exposed to credit loss in the event of
nonperformance by the counterparty, a large financial
institution. However, the Company does not anticipate
nonperformance by the counterparty.
6. Acquisitions
In March and July 1997, the Company acquired certain assets
of a North Carolina corporation and two New York
corporations, respectively. In September 1997, the Company
acquired (i) substantially all of the assets of a New Jersey
corporation and (ii) all of the outstanding stock and
substantially all of the assets of a Connecticut corporation
and related limited liability company, respectively. In
addition to the purchase price paid at closing, the sellers
are entitled to earnouts based on future earnings. The
purchase price for these acquisitions amounted to
approximately $30,732,000, including earnouts recorded in
1999, 1998 and 1997 of $5,534,000, $5,640,000 and
$2,200,000, respectively, and exceeded the fair value of the
net assets acquired resulting in goodwill of approximately
$29,626,000. As consideration for the portion of the
earnouts, in 1999, 1998 and 1997, the Company issued 80,710,
80,710 and 121,066 shares of the Company's common stock,
valued at $333,000, $333,000 and $500,000, respectively.
F-15
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Acquisitions (continued)
In March 1998, the Company acquired substantially all of the
assets of two related Connecticut entities, three Southern
Virginia Offices of a Virginia corporation, and the stock of
a California corporation in three separate transactions; in
June 1998, the Company acquired substantially all of the
assets of two Florida corporations and a New Jersey
corporation in two separate transactions; in July 1998, the
Company acquired all of the outstanding stock of an Illinois
corporation; and, in November 1998, the Company acquired
substantially all of the assets of two Texas corporations.
In addition, to the purchase price paid at closing, the
sellers are entitled to earnouts based on future earnings.
The purchase price for these acquisitions amounted to
approximately $47,214,000, including earnouts recorded in
1999 and 1998 of $6,829,000 and $640,000, respectively, and
exceeded the fair value of the net assets acquired resulting
in goodwill of approximately and $41,890,000. A portion of
the purchase price for two acquisitions consisted of 94,778
shares of the Company's common stock valued at $900,000.
In June 1999, the Company acquired substantially all of the
assets of a division of a North Carolina corporation and, in
November 1999, the Company acquired all of the outstanding
stock of a United Kingdom executive placement and management
advisory company. The purchase price for these acquisitions
of approximately $8,726,000 exceeded the fair value of the
net assets acquired resulting in goodwill of approximately
$8,336,000. A portion of the purchase price for the United
Kingdom acquisition consisted of 344,400 shares of the
Company's common stock valued at $1,636,000.
The aforementioned acquisitions have been accounted for as
purchases and have been included in the Company's operations
from the dates of the respective purchases. Any additional
purchase price based on future earnings related to the
aforementioned acquisitions will be recorded as additional
goodwill upon the determination that the earnouts have been
met. The amortization of goodwill for the years ended
December 31, 1999, 1998 and 1997 was approximately
$3,280,000, $2,191,000 and $854,000, respectively.
F-16
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Acquisitions (continued)
The pro forma unaudited consolidated results of operations
of the 1999 acquisitions on the results of operations for
1999 and 1998 and the 1998 acquisitions on the results of
operations for 1998 and 1997, assuming consummation of the
aforementioned transactions as of the beginning of the
respective periods, are as follows:
Year ended December 31
1999 1998 1997
--------------------------------
(Unaudited)
Total revenue $370,038 $339,406 $220,769
Net income before extraordinary item 6,493 8,189 4,592
Net income 6,493 6,632 4,592
Net income available for common
stockholders 5,393 5,766 3,355
Earnings per share:
Basic 0.52 0.59 0.45
Diluted 0.45 0.47 0.33
7. Stockholders' Equity
In 1997, (i) 2,800 shares of Series A 8% preferred stock
that were outstanding as of December 31, 1996 were converted
into 1,332,412 shares of common stock, (ii) 6,286 shares of
Series B preferred stock were converted into 628,600 shares
of common stock, (iii) 5 shares of Series C preferred stock
were converted into 39,489 shares of common stock and (iv)
33 shares of Series D preferred stock were converted into
565,274 shares of common stock. In 1998, 572 shares of
Series B preferred stock were converted into 55,585 shares
of common stock and 4 shares of Series D preferred stock
were converted into 12,937 shares of common stock.
In March 1998, the Company authorized and issued 1,000
shares of Series F Convertible Preferred Stock for
$20,000,000. The Series F Convertible Preferred Stock
accrues dividends at the rate of 5.5% (increased to 7.5% in
March 19, 2000) per annum and is convertible into common
stock at an initial conversion price of $5.58 per share (the
market value of the Company's common stock at closing).
Expenses in connection with the issuance of the preferred
stock amounted to $1,367,000 and were accounted for as share
issuance expenses.
F-17
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
In December 1997, the Chairman sold 83,462 shares of common
stock, at the current market price of $438,000, to the
Company. Such amount was used to reduce amounts due to the
Company from the Chairman. The shares purchased by the
Company were retired.
In May 1996, the Company loaned a total of $507,000 to ten
employees of the Company at an interest rate of 8% per
annum, payable quarterly over a term of five years. The
funds were used by the employees to purchase a total of
2,170 shares of the Company's Series A Convertible Preferred
Stock from the then current Series A Convertible Preferred
Stock stockholder. The loans outstanding ($126,000 at
December 31, 1999) are collateralized by common stock and
assets with a value in excess of the principal amount of
each loan.
In November 1997, warrants to purchase 50,000 shares of
common stock at $5.25 per share were issued for financial
advisory services to be performed over a two year period.
The warrants were valued at approximately $52,000 and such
value was amortized over the two year period.
In September 1998, the Company authorized a stock repurchase
program of up to 1.0 million shares of the Company's common
stock. In 1999 and 1998, the Company repurchased 612,900 and
57,200 shares of the Company's common stock for
approximately $2,901,000 and $290,000, respectively.
At December 31, 1999, approximately 7,375,000 shares of
common stock have been reserved for future issuance as
follows:
Convertible Preferred Stock 3,584,000
Warrants 550,000
Stock Incentive Plan (see Note 10) 3,241,000
---------
7,375,000
_________
---------
At December 31, 1999, all warrants issued by the Company are
fully vested and have exercise prices ranging from $3.50 to
$5.25. During 1999, no warrants were exercised and
approximately 102,000 warrants that were issued upon the
conversion of Series D convertible preferred stock were
cancelled. During 1998, 1,097,970 warrants were exercised.
F-18
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share pursuant to FASB Statement No.
128, "Earnings per Share", for the years ended December 31,
1999, 1998 and 1997:
1999 1998 1997
------------------------------------
Numerator:
Income from continuing operations $5,785,000 $6,619,000 $5,805,000
Discontinued operations - - (2,999,000)
Extraordinary loss - (1,557,000) -
Preferred stock dividend requirements (1,100,000) (866,000) (137,000)
------------------------------------
Numerator for basic earnings per
share--net income available for
common stockholders 4,685,000 4,196,000 2,669,000
Effect of dilutive securities:
Preferred dividend requirements 1,100,000 866,000 137,000
------------------------------------
Numerator for diluted earnings per
share--net income available for common
stockholders after assumed conversions $5,785,000 $5,062,000 $2,806,000
____________________________________
------------------------------------
Denominator:
Denominator for basic earnings per
share--weighted average shares 10,287,978 9,853,354 7,223,462
Effect of dilutive securities:
Stock options and warrants 456,477 1,615,486 1,120,324
Convertible preferred stock 3,584,299 2,688,172 1,758,412
------------------------------------
Dilutive potential common stock 4,040,776 4,303,658 2,878,736
------------------------------------
Denominator for diluted earnings per
share--adjusted weighted-average shares
and assumed conversions 14,328,754 14,157,012 10,102,198
____________________________________
------------------------------------
Basic earnings per share $ .46 $ .43 $ .37
Diluted earnings per share $ .40 $ .36 $ .28
F-19
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
Income tax expense from continuing operations consists of
the following:
Year ended December 31
1999 1998 1997
------------------------------------
Current:
Domestic $3,771,000 $4,241,000 $3,545,000
Foreign 15,000 19,000 44,000
------------------------------------
3,786,000 4,260,000 3,589,000
------------------------------------
Deferred expense:
Domestic 513,000 379,000 475,000
------------------------------------
Total deferred expense 513,000 379,000 475,000
------------------------------------
$4,299,000 $4,639,000 $4,064,000
____________________________________
------------------------------------
The components of deferred tax assets and liabilities are as
follows:
December 31
1999 1998
---------------------
Deferred tax assets:
Deferred rent $ 539,000 $ 515,000
Allowances for doubtful accounts 376,000 243,000
---------------------
915,000 758,000
Deferred tax liabilities:
Depreciation (70,000) (113,000)
Intangibles (677,000) (468,000)
Cash to accrual adjustments (206,000) (336,000)
Other (15,000) (45,000)
---------------------
(968,000) (962,000)
---------------------
$ (53,000) $(204,000)
_____________________
---------------------
F-20
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
A reconciliation of the statutory Federal income tax rate to
the effective rates is as follows:
Year ended December 31
1999 1998 1997
----------------------
Statutory rate 34% 34% 34%
State and local income taxes
(net of federal tax benefit) 7 7 6
Other 2 - 1
----------------------
Effective tax rate 43% 41% 41%
______________________
----------------------
10. Stock Incentive Plan
Pursuant to the Company's Stock Incentive Plan (the "Plan"),
up to 3,771,567 options to purchase common stock were
reserved for grant. The Plan provides for the granting of
stock options, stock appreciation rights and stock awards.
Stock options intended to be incentive stock options will be
granted at prices equal to at least market price on the date
of the grant. A summary of the activity in the Plan is as
follows:
Number of Weighted Average
Shares Exercise Price
----------------------------
Outstanding at December 31, 1996 1,220,947 $3.12
Granted 641,962 4.13
Canceled (131,964) 2.91
Exercised (1,033) 2.55
---------
Outstanding at December 31, 1997 1,729,912 3.52
Granted 403,000 6.53
Canceled (40,671) 2.79
Exercised (124,112) 3.10
---------
Outstanding at December 31, 1998 1,968,129 4.16
Granted 560,000 4.76
Canceled (139,667) 4.14
Exercised (403,231) 3.47
---------
Outstanding at December 31, 1999 1,985,231 4.47
_________
---------
Exercisable at December 31, 1997 758,443 3.52
Exercisable at December 31, 1998 1,061,680 3.57
Exercisable at December 31, 1999 1,111,620 3.98
F-21
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Stock Incentive Plan (continued)
Options granted vest equally over three years or cliff vest
at the end of a three year term and are exercisable for a
period not to exceed ten years from the date of grant.
Information regarding options outstanding under the Plan at
December 31, 1999 is as follows:
Weighted-
Weighted- Average Weighted-
Exercise Number of Average Remaining Number of Average
Price Options Exercise Contractual Options Exercise
Range Outstanding Price Life Exercisable Price
- -------------------------------------------------------------------------
$2.75 - $4.06 793,398 $3.25 6.3 years 676,176 $3.19
4.16 - 6.00 1,076,833 4.83 8.6 years 390,444 4.72
7.94 - 9.88 115,000 9.63 8.5 years 45,000 9.38
--------- ---------
1,985,231 1,111,620
_________ _________
--------- ---------
11. Stock-Based Compensation
Pro forma information regarding net income and earnings per
share is required by SFAS 123 and has been determined as if
the Company had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions:
Year ended December 31
1999 1998 1997
---------------------------
Assumptions
Risk-free rate 5.83% 5.30% 5.65%
Dividend yield 0% 0% 0%
Volatility factor of the expected
market price of the Company's
common stock .68 .76 .62
Average life 5 years 5 years 3 years
F-22
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Stock-Based Compensation (continued)
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions, including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the
vesting period of the options. The Company's pro forma
information is as follows:
Year ended December 31
1999 1998 1997
------------------------------------
Pro forma net income available
for common stockholders $5,243,000 $3,694,000 $2,112,000
Pro forma earnings per share:
Basic .51 .37 .29
Diluted .42 .32 .21
The weighted average fair value of options granted during
the years ended December 31, 1999, 1998 and 1997 was $2.93,
$4.26 and $1.84, respectively. The weighted average
remaining contractual life of options exercisable at
December 31, 1999 is 6.6 years.
12. Commitments and Contingencies
The Company leases office space under operating leases which
have various expiration dates through December 2013. The
leases provide for additional rent based on increases in
operating costs and real estate taxes. The Company also
leases equipment under capital leases expiring at various
times through August 2003.
F-23
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Future minimum lease payments at December 31, 1999 under
capital leases and noncancelable operating leases (shown net
of $528,000 of sublease income per annum through 2000) with
remaining terms of one year or more are as follows:
Capital Operating
Leases Leases
-----------------------------
2000 $ 476,000 $ 1,802,000
2001 343,000 2,331,000
2002 162,000 2,114,000
2003 79,000 1,700,000
2004 - 1,564,000
Thereafter - 6,342,000
-----------------------------
Total minimum lease payments 1,060,000 $15,853,000
___________
-----------
Less amounts representing interest 102,000
----------
Present value of net minimum
lease payments 958,000
Less current portion 435,000
----------
Long-term portion $ 523,000
__________
----------
Included in property and equipment at December 31, 1999 and
1998 are equipment recorded under capital leases with a cost
of $1,683,000 and $1,656,000, respectively, and accumulated
depreciation and amortization of $514,000 and $332,000,
respectively. Amortization of equipment recorded under
capital leases is included with depreciation expense.
Rent expense, including escalation charges, and net of
sublease income of $498,000 for the year ended December 31,
1999 and $538,000 for the years ended December 31, 1998 and
1997 was $2,634,000, $1,912,000 and $1,661,000,
respectively.
The Company is party to litigation arising out of the normal
course of its business. In the opinion of management, all
matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind or involve
such amounts, as would not have a material adverse effect on
the financial position, results of operations or cash flows
of the Company.
F-24
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Retirement Plan
The Company has a 401(k) plan covering substantially all its
domestic employees. The plan does not require a matching
contribution by the Company.
14. Segment Information
Major Customers
For the years ended December 31, 1999 and 1998, one staffing
services customer accounted for 11% and 14%, respectively,
of revenues from continuing operations. For the year ended
December 31, 1997, another customer accounted for 10% of
revenues from continuing operations.
Geographic Information
For the years ended December 31, 1999, 1998 and 1997, the
Company derived substantially all of its revenues from
businesses located in the United States, and no other
country accounted for more than 10% of the Company's
revenues.
Business Segments
The Company classifies its business into two fundamental
areas, staffing and executive search. Staffing consists of
the placement and payrolling of temporary and permanent
office, clerical and information technology professional
personnel. Executive search focuses on placing middle to
upper level management positions.
The Company evaluates performance based on the segments'
profit or loss from operations before unallocated corporate
overhead. The accounting policies of the reportable segments
are the same as those described in the summary of
significant accounting policies (see Note 2).
F-25
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Year ended December 31, 1999
Executive
Staffing Search
Services Services Total
---------------------------------
(Dollars in Thousands)
Revenues $ 334,743 $ 25,999 $ 360,742
Depreciation and amortization 3,930 481 4,411
amortization
Termination of employment contract 2,329 - 2,329
Interest expense 5,801 8 5,809
Interest income (89) (18) (107)
Segment income from continuing
operations before income tax expense 6,371 6,616 12,987
Income tax expense 2,785 2,748 5,533
Segment profit 3,586 3,868 7,454
Segment assets 127,518 19,392 146,910
Expenditures for long lived assets 1,538 381 1,919
Year ended December 31, 1998
Executive
Staffing Search
Services Services Total
---------------------------------
(Dollars in Thousands)
Revenues $ 271,518 $ 19,785 $ 291,303
Depreciation and amortization 2,694 258 2,952
Interest expense 4,107 6 4,113
Interest income (26) (43) (69)
Segment income from continuing
operations before income tax expense 8,654 4,509 13,163
Income tax expense 3,609 1,880 5,489
Segment income from continuing
operations and before extraordinary item 5,045 2,629 7,674
Extraordinary loss (1,557) - (1,557)
Segment profit 3,488 2,629 6,117
Segment assets 106,636 19,602 126,238
Expenditures for long lived assets 1,493 266 1,759
F-26
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Year ended December 31, 1997
Executive
Staffing Search
Services Services Total
-----------------------------
(Dollars in Thousands)
Revenues $ 125,316 $ 17,526 $ 142,842
Depreciation and amortization 1,225 228 1,453
Interest expense 2,004 12 2,016
Interest income - (20) (20)
Segment income from continuing
operations before income tax expense 2,858 3,754 6,612
Income tax expense 1,334 1,752 3,086
Segment profit 1,524 2,002 3,526
Segment assets 48,332 15,416 63,748
Expenditures for long lived assets 541 154 695
Year ended December 31
1999 1998 1997
-----------------------------
(Dollars in Thousands)
Reconciliation to net income
Total profit for reportable segments $ 7,454 $ 6,117 $ 3,526
Unallocated amounts:
Gain on sale of investment - 901 4,272
Interest expense (522) (402) (646)
Interest income 15 83 84
Corporate overhead (2,396) (2,487) (453)
Loss from operations of discontinued
segment - - (2,999)
Income tax benefit (expense) 1,234 850 (978)
-----------------------------
Net income $ 5,785 $ 5,062 $ 2,806
_____________________________
-----------------------------
F-27
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Year ended December 31
1999 1998 1997
-----------------------------
(Dollars in Thousands)
Reconciliation to total assets
Total assets for reportable segments $146,910 $126,238 $63,748
Other assets 1,509 708 3,588
-----------------------------
Total assets $148,419 $126,946 $67,336
_____________________________
-----------------------------
15. Termination of Employment Contract
In March 1999, the Company incurred costs of $2,329,000
associated with the termination of an employment contract.
16. Gain on Sale of Investment
In March 1997, Citigate, an entity in which the Company had
an 18.3% interest, was acquired by Incepta Group, plc.
("Incepta"), a United Kingdom public company. The Company
received 13,805,406 shares of Incepta in exchange for its
investment in Citigate. The Company sold these shares in
March and October 1997 for $4,363,000 and recognized a gain
of approximately $1,719,000. The Company was also entitled
to an additional 7,072,307 shares of Incepta if Incepta met
certain earnings targets for the year ended September 30,
1997. In October 1997, the Company was advised that such
targets had been met and, accordingly, an additional gain of
approximately $2,553,000 was recognized in 1997. In May
1998, the Company sold its remaining investment in Incepta
and recognized a gain of approximately $901,000.
F-28
<PAGE>
Schedule II - Valuation And Qualifying Accounts
Headway Corporate Resources, Inc. and Subsidiaries
December 31, 1999
</TABLE>
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
_____________________________ __________ ____________________ __________ __________
Additions
---------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expense Accounts Deductions Period
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Deducted from asset account
Allowance for doubtful accounts $593,000 $504,000 $- $139,000 $958,000
Year Ended December 31, 1998:
Deducted from asset account
Allowance for doubtful accounts $371,000 $427,000 $- $205,000 $593,000
Year Ended December 31, 1997:
Deducted from asset account
Allowance for doubtful accounts $122,000 $249,000 $- $ - $371,000
</TABLE>
F-29
<PAGE>
Exhibit No. 16
Headway Corporate Resources, Inc.
Form 10-K
File No. 0-23170
SUBSIDIARIES OF THE COMPANY
Name State or
Jurisdiction
(1) Headway Corporate Staffing Services, Inc. ("HCSS") Delaware
(2) HCSS East, Inc. ("East") Delaware
(3) HCSS West, Inc. ("West") Delaware
(4) HCSS Holdings, Inc. Delaware
(5) Headway Corporate Staffing Service of New york, Inc. New York
(a subsidiary of HCSS)
(6) Corporate Staff Administration, Inc. (a subsidiary New York
of HCSS)
(7) Certified Technical Staffing, Inc. (a subsidiary New York
of HCSS)
(8) Headway Corporate Staffing Services of North Delaware
Carolina, Inc. (a subsidiary of HCSS)
(9) Headway Corporate Staffing Services of Delaware
Connecticut, Inc. (a subsidiary of HCSS)
(10) ASA Personnel Services, L.L.C. (a subsidiary of HCSS) Delaware
(11) Cheney Associates, L.L.C. (as subsidiary of East) Delaware
(12) Headway Corporate Staffing Services of Florida, L.L.C. Delaware
(a subsidiary of East)
(13) Headway Corporate Staffing Services of New Delaware
Jersey, L.L.C. (a subsidiary of East)
(14) Headway Technology Resources of Texas, L.L.C. Delaware
(a subsidiary of East)
(15) Headway Corporate Staffing Services of Delaware
California One, L.L.C. (a subsidiary of West)
(16) Headway Corporate Staffing Services of Delaware
California Two, L.L.C. (a subsidiary of West)
(17) Carlyle Group, Ltd. Illinois
(18) Whitney Partners, L.L.C. ("Whitney") Delaware
(19) Tyzack Holdings Limited ("Tyzack") United Kingdom
(20) The Whitney Group (Europe) Limited United Kingfom
(a subsidiary of Tyzack)
(21) Whitney Asia PTE Ltd. (a subsidiary of Whitney) Singapore
(22) The Whitney Group (Asia) Limited Hong Kong
E-1
Exhibit No. 17
Headway Corporate Resources, Inc.
Form 10-K
File No. 0-23170
Consent Of Independent Auditors
Headway Corporate Resources, Inc.
New York, New York
We consent to the incorporation by reference in the
Registration Statement (Form S-3 No. 333-08615) of
Headway Corporate Resources, Inc. and in the related
Prospectus of our report dated February 21, 2000, with
respect to the consolidated financial statements and
schedule of Headway Corporate Resources, Inc. included
in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
New York, New York
March 28, 2000
E-2
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<CIK> 0000914435
<NAME> HEADWAY CORPORATE RESOURCES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<BONDS> 73,273
20,000
0
<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 148,419
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<INCOME-PRETAX> 10,084
<INCOME-TAX> 4,299
<INCOME-CONTINUING> 5,785
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<EXTRAORDINARY> 0
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<NET-INCOME> 5,785
<EPS-BASIC> 0.46
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